Pressure on Spain Grows as Country Delays Bailout

Time may be running out for Europe's fourth-largest economy, with bad debts at the Spain's banks rising to a record and Lloyds bank predicting it will request aid before October.

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Spanish Prime Minister Mariano Rajoy has so far avoided asking for a full sovereign bailout, which is likely to come with further conditions, including tough government spending cuts.

"It is obvious that Rajoy tries to minimize domestic damage i.e. regional election in late-October, however it is arguable whether the market will allow him this time period," Lloyds analysts wrote in a report.

Meanwhile, bad debts at the country's banks hit a record high on Tuesday and now account for nearly 10 percent of outstanding portfolios.

But there was some respite for Spain on Tuesday, with the government able to sell 4.6 billion euros of bonds in an auction, higher than the 3.5 billion to 4.5 billion euros it had targeted. Yields were also a bit lower than last month's auction.

"Although investors are starting to lose patience with Spain, they don't want to throw in the towel for fear of missing out on a possible bond-buying-driven rally," Nicholas Spiro, managing director of Spiro Sovereign Research said.

Yet that respite may not last. According to Spiro, the auctions are increasingly taking on an artificial feel as both Spain and the European Central Bank (ECB) play a game of chicken.

Spanish bond yields have edged up in recent weeks, with yields on the 10-year bond briefly crossing 6 percent before the bond auction results were released on Tuesday.

Meanwhile, Spanish stocks have declined for two days in a row and the IBEX 35 index was down 1.7 percent by 12 p.m. on Tuesday.

The Spanish government has been trying to calm markets.

Economy Minister Luis de Guindos said the country will adopt new reforms to boost growth when it releases its budget on September 28th.

On Tuesday, Deputy Prime Minister Soraya Saenz de Santamaria said the country was still considering the terms of a European Union bailout.

But pressure continued to build on Spain with Charles Dallara, managing director of the Institute of International Finance (IIF), which represents major lenders, warning that the ECB bond-buying program was at risk of failure unless Spain stepped forward and asked for a bailout.

"The announcement by the ECB was very bold on the one hand, but it will come to naught, nothing, unless Spain or Italy ask for EU/IMF endorsement of an economic program," Dallara said, according to Reuters.

"The stakes are high as further delays increase the risk of Spain having to request a fully fledged programme should the country lose market access," Barclays analysts said.